Taxation of Property Dispositions Outline
Professor Ryan Bornstein
IRC §61(a)(3): GI includes gains from dealings in property.
(a) Computation of gain or loss – The gain from the sale or other disposition of property shall be the excess of the AR therefrom over the AB provided [Gain = AR – AB] in IRC 1011 determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized [Loss = AB – AR].
(b) Amount realized – The AR from the sale or other disposition of property is sum of any money received plus the FMV of the property (other than money) received. In determining the AR—
(1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164(d) as imposed on the purchaser, and
(2) there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.
(c) Recognition of gain or loss – Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.
§ NOTE: not all realized gains are recognized or taxed immediately:
o IRC 453: Installment Sales
o Non-Recognition Provisions:
§ IRC 1041: property acquired between spouses or incident to divorce
§ IRC 1031: Like Kind Exchanges
§ IRC 1033: Involuntary Conversions
(d) Installment sales – Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.
(e) Certain term interests
(1) In general.–In determining gain or loss from the sale or other disposition of a term interest in property, that portion of the AB of such interest which is determined pursuant to section 1014, 1015, or 1041 (to the extent that such AB is a portion of the entire AB of the property) shall be disregarded.
(2) Term interest in property defined.–For purposes of paragraph (1), the term “term interest in property” means:
(A) a life interest in property,
(B) an interest in property for a term of years, or
(C) an income interest in a trust.
(3) Exception.–Paragraph (1) shall not apply to a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons.
o Realization Requirement:
§ Realized Gain: AR – AB (in the property transferred)
§ Realized Loss: AB – AR
§ IRC 1001 only requires recognition of gain or loss if a TP has experienced a realized event – a sale, exchange, or other disposition for value – in which TP receives something materially different from what he had before the exchange.
§ Gains/losses MUST be realized before they are recognized.
§ Different legal interest: the exchange must simply result in the TP having different legal interests than the TP had before the transaction.
IRC §1011(b): AR = the total FMV of the TP receives in the transaction (Reg. 1.1001-1,-2: cash, property, services, and the assumption of liabilities) in exchange for the property transferred.
Adjusted Basis (AB): The AB for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under IRC §1012) adjusted as provided in IRC §1016.
IRC §1012: The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).
TP’s Initial Basis:
(1) IRC §1012: Cost of the Property (“cost basis”)
a. For property acquired by purchase, the purchaser’s initial basis is the cost of the property. (cash, FMV of property received, and liabilities assumed)
b. Reg. 1.1012-1(a): The cost is the amount paid for such property in cash or other property.
(2) IRC §1014: Property Received by Decedent (“stepped-up basis)
a. IRC 1014(a): Basis of property received from a decedent is the FMV of the property either (1) on the date of death; or (2) alternate valuation date (if elected), which is 6 months from date of death.
i. FMV is defined as “the price at which the property would change hands between a willing seller and a willing buyer, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.”
b. This is a “stepped-up basis” bc generally the property received has a FMV greater than its basis in the hand of the decedent.
i. Means that the amount of increased value in the property is NOT subject to income tax.
c. IRC 1014(b)(1): Property acquired by bequest, devise, inheritance, or by the decedent’s estate from the decedent.
d. IRC 1014(b)(2): Property decedent transferred during the life if the value of the property is nevertheless required to be included in decedent’s gross estate for federal tax purposes.
e. IRC 1014(b)(6): Surviving spouse gets a basis in ½ of the surviving share of community property if at least ½ of the whole of the community interest was included in the decedent spouses estate.
(3) IRC §1015: Property Received by Gift (“transferred basis”)
a. IRC 1015(a): Donee takes the property with the same basis in the hands of the donor (increased by any gift tax paid by the donor) à called “transferred basis.”
i. Exception: when the donor’s AB is > FMV, the FMV is used in determining a loss.
b. IRC 102(a): GI does NOT include the value of property acquired by gift, bequest, or inheritance.
c. General Rule: AB < FMV: donne takes donor’s AB + gift tax paid [IRC 1015(d)]
d. Exception: AB > FMV:
i. Loss (SP < FMV): donee’s AB is FMV at time of gift.
ii. Gain (SP > donor AB): donee’s AB is same as donor’s basis + gift tax paid
iii. No gain/loss: price donee sold the property for is in between the donor’s AB and FMV of the property, so donee’s AB = AR.
i. General Rule/Gain property: Alan owns 1,000 shares of ABC stock and his basis in it is $15,000. Alan gives the stock to his daughter. She takes his basis of $15,000.
ii. Loss property: Alex owns land and her basis is $50,000. The FMV of the land is $20,000 on the date she gives it to her sister.
1. If sister sells it for $200,000 (gain), her AB is $50,000 and she has a gain of $15,000.
2. If sister sells it for $10,000 (loss), her AB is $20,000 and she would have a loss of $10,000.
iii. No gain or loss: (same facts as #2) – If sister sells it for any amount between FMV ($20,000) and Donor’s AB ($50,000), she will recognize no gain or no
uestion are in the employee’s line of business.
IRC 132(b)(2): Employer incurs no substantial additional cost (including foregone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service). AND
Factors to determine whether there is substantial additional cost:
The amount of revenue an employer loses because of providing the service to the employee rather than to a paying customer.
The amount of time spent by the other employees in providing a service for the employer.
The services are provided on a nondiscriminatory basis (not for highly compensated individuals only). AND
Examples: airline, railroad, or subway seats to its employees. Hotel rooms to employees, free telephone service to telephone employees.
IRC 132(a)(2): Qualified Employee Discount: 3 Requirements:
1. Employee Discount: the amount of the discount is determined by comparing the price paid by the employee and the price paid by the general public; AND
2. Qualified Property/Service: these are services and property (other than real estate and securities) that the employer sells in the ordinary course of business; AND
3. Limitation on Discount: For services, the discount must not exceed 20%. For property, the discount must not be greater than the “gross profit percentage” at which the property is sold to the public.
ii. “Qualified employee discount” means any employee discount on items of qualified property or services purchased from an employer for use by the employee which:
1. IRC 132(c)(4): Are available for sale to customers in ordinary course of business.
iii. The discount must NOT exceed:
1. IRC 132(c)(1)(A): In property (other than real property and personal property held for investment): The maximum discount for property is the employer’s “gross profit percentage” of the price at which the property is being offered by the employer to the customers. OR
a. (Aggregate sales price reduced by cost) divided by (Aggregate sales price).
i. The fraction is based on sales of all property in the employee’s line of business, not just the discounted item.
ii. If the discount exceeds the amount permissibly excluded, the employee must report some income from the transaction (the excess over the permitted exclusion).
2. In services (which includes purchase of insurance policies but not loans to employees of financial institutions): the exclusion may NOT exceed 20% of the price at which the services are being offered to customers.
iv. The discount may take the form of either a price reduction or a rebate.
v. Reg. 1.132-3(a)(4): The exclusion applies if the services are free, at cost, partial cost, or under a case rebate program.